October 26, 2020
When meeting with clients on estate planning matters, I find that generally the place where people get “stuck” on what to do is the common disaster scenario. I often refer to this as the “Disneyland” clause – i.e., what do you do if you and your entire family are on a Christmas trip to Disneyland and the plane goes down?
I typically get one of the following responses from clients regarding the common disaster scenario:
- That would never happen. I do not even want to think about that scenario.
- I guess maybe I would list out my nieces and nephews?
- I will need to do some thinking. Maybe there is a charity I would like to benefit.
Today’s blog post is going to focus on response #3 – charitable donations.
Although some of my clients are already informed on charitable donation tax credits, for the most part I find that the initial intention behind a charitable donation has nothing to do with the potential tax credit. Instead there is usually an emotional connection to a particular cause and the tax credit is merely the “icing on the cake”.
Do you have a qualified charity?
Keep in mind that in order to obtain the tax credit, the charity must be registered with Canada Revenue Agency (“CRA”). In addition, it is key that the charity is correctly named in the testamentary document. In practice, I typically complete a search for the charity on the Government of Canada website: https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en. In the Will itself, I will ensure to use the formal registered name of the charity, and I typically include the charitable registration number for ease of identification.
There are some circumstances where the client wishes to leave funds for a quasi-charitable purpose (i.e., for a project to be completed by a municipal board) that will not qualify for a donation tax credit. This is perfectly acceptable – as long as the client understands that the donation will not result in a tax credit.
When can the tax credit be claimed?
For persons who died after 2016, donations made pursuant to a will (or designated in a financial instrument such as an RRSP, RRIF, TFSA and/or life insurance policy) will be deemed to be made by the estate at the time the property is transferred to the charity. There is flexibility within the estate as to when/how the donation is allocated.
If the donation is made within 60 months of the death, the donation may be claimed in: (1) the final tax return of the deceased; (2) the tax return of the deceased prior to the year of death; or (3) the tax return of the deceased for the year when the transfer to the charity was made.
If the donation is made within 36 months of death, the donation can be claimed in any of the above-noted circumstances, or in any prior tax year of the estate.
Thanks to one of my readers for asking me to address “in-kind” donations!
Sometimes, instead of leaving a specific sum of money to a charity, a person wants to leave a non-cash gift. For example, if someone donated a piece of art, shares of a public corporation or a car to the charity. We typically refer to this as leaving a gift “in-kind”. Although this is perfectly legitimate, it can sometimes create some hurdles on valuation.
In order for CRA to issue a charitable donation receipt, it needs to be able to verify the amount of the gift. This is easy to do when the gift is money. However, it is slightly more difficult when the gift is an asset. The onus is on the charity to ensure that it has accurate information about the fair market value of the gift, and that the correct amount is listed on the charitable donation receipt. For more information on valuing in-kind gifts, please see this information bulletin from CRA: https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/issuing-receipts/determining-fair-market-value-gifts-kind-non-cash-gifts.html. CRA suggests that if the value of the gift is over $1,000, a formal appraisal should be obtained.
How do I choose a charity?
Occasionally, a client will not know what charity they wish to benefit and will ask me to be a part of the brainstorming process. In this instance, I will usually have the client list off all the things that are important to them in their life and I write it down on a white piece of paper. This will include educational pursuits, hobbies, past life obstacles, current things they are passionate about. Once we have a full list, we can group the items into categories. Then, I typically ask the following question:
“If you could choose, would you prefer to help someone locally,
or would you prefer for your gift to have a broader/global impact?”
The Government of Canada charitable registration site is a great source of information about potential options. I usually encourage clients to spend some time completing research on the options available to them prior to deciding. Keep in mind that you can name more than one charity. In addition, if the client has a very specific wish as to what the money would be used for, I usually encourage the client to reach out to the charity to find out if the charity would be amenable. Some charities provide the ability for the client to fill out internal documentation in advance which sets out specific wishes/intentions for the gift.